Options for financing solar power systems growing

Homeowners can now afford to go green

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Andres Quiroz, an installer for Stellar Solar, carries a solar panel during installation at a home in Encinitas. New financing options makes solar power systems more affordable for the average homeowner.Photo by Sam Hodgson/Bloomberg

At a time when the costs for materials going into solar energy systems have dropped, installers of that home energy option — once considered too expensive for most homeowners — are reaching out to pitch its affordability to middle-income people.

Those pitches can be read in newspapers or on billboards along the freeways near downtown San Diego, heard in radio advertisements and visualized on TV. Whether one’s motivation is to be personally less demanding on the grid, to save on monthly energy costs or to be more sustainable, there’s more than one way to finance a photovoltaic solar energy system should one want it.

Dustin Urquhart, business development director at Sullivan Solar Power, said that which way is best for the consumer can be determined in ways not too different than with any other large transaction: with a good look at the customer’s monthly ability, how much the energy system would produce to offset monthly energy costs, and what the customer wants in terms of responsibility -- both during the repayment period and after.

There are several options, Urquhart explained. And there may be more in the future if efforts to expand a program for commercial properties to include residential work as well are successful.

For now, leasing a PV solar system seems to be the most popular avenue.

“That’s essentially where the homeowner is paying a monthly rate based off of what the system is producing,” Urquhart said. “So they can typically get a locked rate of a monthly lease payment that is cheaper than their current electric bill.”

Often called a zero-down lease for its offering of installation without upfront payment, the third party-owned installation is a good option for homeowners without access to large capital sources, Urquhart added.

According to a report released in February by San Francisco-based solar power provider SunrunInc. and PV Solar Report, third-party-owned solar installations accounted for 74 percent of California’s 2012 home solar market, delivering a reported $938 million to the California economy through the year.

Urquhart said that sounds about right, estimating that 75 to 80 percent of the systems he sees going up are under third-party ownership.

But not everyone can qualify for that. For typical leases on installations, a credit score of at least 670 or 680 is needed, Urquhart said.

Mahesh Shah, chief executive officer of Figtree Energy Financing, said some lenders could require scores even higher than that. Figtree’s business is focused on financing commercial installations, but the basic premise of creditworthiness remains an important part of any traditional PV system lease, Shah said.

“In order to qualify for all those programs, you have to have stellar credit,” Shah said. “They’re absolutely right,” he added about installer advertising no money down on systems installed. “But you have to qualify.”

Consumers could benefit from guarantees on the system’s production from the third-party financier, as well as having maintenance costs covered.

Power purchase agreements

Although most popular right now, leases aren’t the only way to go.

In the commercial sector — as is seen with many contracts signed by San Diego Gas & Electric with solar project developers and their larger systems, such as NRG Solar’s (NYSE: NRG) newly operational Borrego I Solar Generating Station — it’s common for the host customer to buy the services produced by the solar system, rather than the solar system itself. That business model is referred to as a power purchase agreement, and there are similar models available for residential installations.

At Sullivan, that model is referred to as a pre-paid lease, in which the customer is pre-paying and purchasing electricity at a fixed rate for 20 years. The resulting payment each month is typically less expensive than the Tier 1 and Tier 2 rates charged by utilities and governed by the California Public Utilities Commission, Urquhart said.

“On average, it could be anywhere from 6 up to 10, 11 cents per kilowatt-hour,” he said. “What you’re doing is you’re fixing the cost for 20 years based off your consumption, and they are pre-paying for that electricity.”

He likened the model to fuel prices today, giving a hypothetical of someone entering into an agreement 20 years ago for fuel at the prices of that time, but still paying that same price today. Because of the prepayment, no minimum credit score is needed, Urquhart said.

Then there’s outright ownership of a PV system. Most homeowners wouldn’t have the cash to pay for it upfront, so loan options are available. Sullivan recently rolled out its newest loan option, which provides full ownership of the system after a 12-year payoff.

Like with the traditional lease, a homeowner must pass a credit check for the loan. Urquhart said Sullivan’s new program requires a minimum credit score of 640. The entire system cost or just a portion of it could be financed.

The upside to ownership is two-headed, Urquhart explained.

It can provide the quickest return on investment since loan repayment programs can be close to half as long as a 20-year lease, and it gives the homeowner the ability to personally take advantage of tax credits and rebates for the PV system, as opposed to the financier claiming them as they would under a lease.

But still, he added, in the end, the consumer owns not only the system, but the maintenance that comes with it. An installer may offer a warranty on the work and production ability of the system for around 10 years, and the solar panel manufacturer may offer a warrantee up to 25 years on the panels’ production. But the lifespan the inverters integral to the system — making the produced energy usable inside the home — may have already run out by the time the loan is repaid, leaving the responsibility to replace it on the homeowner.

Leases typically come with an option for a customer to purchase a system at fair market value — which Urquhart said is often negotiable — at the close of the lease term, or to have the system removed at no additional cost.

With third-party leasing emerging in just the past few years, it’s tough to gauge what post-term options might be most popular with homeowners once decision time comes.

“Aggressive lease options started really to make a presence about two to three years ago,” Urquhart said.

PACE programs for businesses

An option not yet available to homeowners but already a choice for commercial property owners is property assessed clean energy, or PACE programs. PACE programs allow lending companies to provide loans to property owners that are repaid through regular property tax assessments. The funding mechanism leaves the payoff of upgrades connected with the property, as opposed to the individual or the business.

The Federal Housing Finance Agency, which creates the rules affecting mortgages backed by Fannie Mae and Freddie Mac — which comprises a great deal of mortgages in the housing market — has discouraged the practice in the residential sector over concerns of financial risk.

But municipalities up and down the state, including San Diego County, are working to convince the FHFA that PACE is safe for the housing market. In February, the San Diego County Board of Supervisors approved the drafting of a letter to President Barack Obama, urging him to communicate the benefits of residential PACE to FHFA before the agency gathers for its next round of rulemaking.

“I think that that would really help, and drive more of these solar systems to come online,” Urquhart said. “The more options that people have available, the better it is for our industry.”